A bit over two years ago, we reported here on the district court decision in TDY Holdings v. United States, 122 F. Supp. 3d 998 (S.D. Cal. 2015), in which the court allocated 0% liability to the United States, despite the fact that it was an undisputed PRP at the site. The decision was surprising at the time and, as with many surprising decisions, it did not survive on appeal as earlier this month the Ninth Circuit held in TDY Holdings v. United States, No. 15-56483, 2017 U.S. App. Lexis 19371 (9th Cir. Oct. 4, 2017), that TDY, a military contractor, was not solely responsible for remediation costs incurred at a former aeronautical manufacturing plant and thus remanded the matter back to the lower court to take another pass at allocating liability among the two parties. The Ninth Circuit’s opinion thus allows military contractors seeking contribution from the government for remediation costs incurred at former defense sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) to breathe a long sigh of relief.

As some may recall from the earlier proceedings, TDY operated an aeronautical manufacturing plant in California from 1939 to 1999. TDY generated nearly all of its business from military contracts with the United States government. The plant manufactured aircrafts and aircraft parts for the military in support of the country’s war efforts, and much of the equipment used was government owned. For quality purposes, the government’s contracts with TDY required the use of chromium compounds and chlorinated solvents in manufacturing operations, which were released into the environment during the manufacturing process. At the time, however, little was known about the dangers of these substances. It was not until environmental laws were enacted in the 1970s, that they were listed as “hazardous substances” requiring remediation under CERCLA. As the understanding of these chemicals evolved, TDY adapted its procedures to limit their release. Between the 1970s and 1999, the government paid CERCLA remediation costs incurred at the site and indirect costs for compliance with state and federal environmental laws.

TDY entered into a settlement agreement with the San Diego Unified Port District regarding contamination at the site. Subsequently, TDY brought a contribution action against the government for costs incurred under CERCLA, alleging that the government was liable as a former owner under CERCLA because it owned equipment at the site. While the government's PRP status was not disputed, nevertheless the district court refused to impose liability on the government because it concluded that TDY’s manufacturing procedures, and not any action by the United States, led to the release of hazardous substances that contaminated the site. The district court thus found for the government and held TDY liable for 100 percent of past and future remediation costs.

TDY appealed the decision to the Ninth Circuit which reversed and remanded the case for further proceedings. In reaching its decision the Ninth Circuit addressed existing case law on allocating liability for defense sites and the course of dealings between TDY and the government.

The Ninth Circuit found the lower court erroneously analyzed how remediation costs should be allocated between military contractors and the government. In particular, the court discussed United States v. Shell Oil Co., 294 F.3d 1045 (9th Cir. 2002), and Cadillac Fairview/California, Inc. v. Dow Chem. Co., 299 F.3d 1019 (9th Cir. 2012), both of which allocated 100 percent of remediation costs to the government under the reasoning that the contractor’s remediation costs were part of the war effort which Americans should pay. The court held that the district court’s decision in TDY to allocate 100 percent of liability to a military contractor for contamination incurred in support of a national defense program was a “180 degree departure from our prior case law” and such a deviation was unwarranted.

The Ninth Circuit also pointed to the fact that the government required TDY to use the hazardous chemicals at issue at a time when their danger was unknown. The Court found that this requirement, coupled with TDY’s efforts to comply with new environmental regulations as they were enacted and to modify its practices to reduce environmental contamination, further undermined the district court’s decision to hold TDY solely liable.

Additionally, the Ninth Circuit found that the district court failed to give appropriate weight to the course of dealings between TDY and the government. From the 1970s to 1999, the government paid between 90 and 100 percent of the CERCLA cleanup costs that arose at the site. The district court concluded that the government’s history of paying indirect environmental compliance expenses did not constitute an acknowledgement of liability for remediation costs in the present case. The Ninth Circuit disagreed and refused to categorize the government’s payments as contract overhead or compliance costs. Rather, the court found that TDY could have relied on the government’s payment history and continued to contract with the government under the belief that remediation costs would be reimbursed or shared. The court found the government’s prior payments were, therefore, relevant in its allocation of liability.

Judge Watford issued a concurring opinion, agreeing that TDY should not be liable for 100 percent of the clean-up costs, but noting that “the government must, as a matter of equity, be allocated some share of clean-up costs does not mean that its share must be substantial.”

The Ninth Circuit’s decision in TDY Holdings will have positive implications for military contractors facing remediation costs. In particular, the court’s holding in TDY Holdings will provide military contractors with insight when assessing whether to bring a contribution action against the federal government and leverage during settlement discussions. The court’s allocation of liability on remand will provide a better understanding of the extent to which the government can be held liable.